Moving forward with the OECD’s two-pillar solution

20 November 2021

On Friday 8 October 2021, 136 of the 140 (now 137 of 141) countries that comprise the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS) agreed the OECD’s proposed two-pillar solution to address the tax challenges arising from the digitalisation of the global economy, which could bring about a sea-change in the international tax landscape as soon as 2023.

Expected benefits of the two-pillar solution

The OECD estimates that approximately $125bn of profits will be reallocated for tax purposes annually to countries worldwide as a result of the pillar one measures, with a further $150bn per year in new global tax revenues expected to arise from both pillars. The OECD also expects the two-pillar solution to stabilise the international tax system and increase tax certainty for taxpayers and tax administrations alike.

The anticipated financial benefits are clearly substantial, but where these benefits will crystallise will be equally important.

Pillar one

Pillar one provides that where multi-national enterprises (MNEs) generate a profit before tax in excess of 10 per cent of their total revenues, taxing rights over 25 per cent of that excess profit will be re-allocated to the jurisdictions where the customers of those MNEs are located. MNEs with global revenues exceeding €20bn will be within scope of these new rules, with that threshold expected to be reduced to €10bn following a review seven years after the agreement comes into force.  

Concerns raised by developing countries that the pillar one measures could favour the larger global economies will be countered through the use of elective regimes and the establishment of a simplified and streamlined approach to the application of the arm’s length principle in specific circumstances.

The tax compliance obligations arising in respect of pillar one will be streamlined such that in-scope MNEs can manage the process through a single entity.

The permanent removal of all digital services taxes (and other relevant similar measures) will also be implemented under pillar one.

A recurring sticking point of pillar one, however, has been reaching a consensus for the calculation of ‘Amount B’ – this broadly involves the application of the arm’s length principle to in-country baseline marketing and distribution activities. The two-pillar solution agreement documents confirm that the calculation methodology will be simplified and will have a particular focus on the needs of low-capacity countries but remain noticeably light on detail in this regard. This may well prove to be an area that will consume significant resource within the OECD if the implementation timetable is to be met. 

Pillar two 

The primary focus of pillar two is the new global anti-base erosion (GloBE) rules, which will provide for a global minimum tax rate of 15 per cent on all in-scope MNEs. MNEs that meet the €750m turnover threshold that applies for country by country reporting will be within scope of pillar two, although the rules will also provide for specific temporary exclusions for businesses in the initial phase of international activity and for jurisdictions to adopt de minimis exclusions for low revenue and profit levels in defined circumstances.

The minimum tax rate may end the ‘race to the bottom’ culture of corporate income tax rate cuts of recent years, but the OECD also stresses that ending other competition between tax authorities is not its intention.

Pillar two will also introduce a new treaty-based rule that will require all Inclusive Framework jurisdictions, when requested to do so, to apply a ‘subject to tax rule’ in their bilateral tax treaties that will allow paying jurisdictions to charge withholding tax on cross border payments of interest, royalties and other defined payments (ie those payments which can be used by MNEs to erode their tax base) that are taxed below 9 per cent in the recipient jurisdiction. This measure aims to protect the rights of developing countries to tax these payments if they are not already subject to tax at the minimum rate of 9 per cent.


The two-pillar solution timetable suggests work on all new rules will be finalised by the end of 2022, ready for implementation in 2023, albeit the supporting detail confirms that certain aspects of the pillar two GloBE regime will not be implemented until 2024.


The fact that 137 of the 141 members of the OECD/G20 Inclusive Framework have now signed the two-pillar solution agreement reflects the success of the OECD in building a consensus, and the potential financial rewards, coupled with the aggressive implementation timetable, have certainly grabbed the headlines.

However, a significant amount of work no doubt remains to be done before member countries are all in a position to introduce the legislation necessary to implement the solution on a consistent global footing, and this consistency of implementation will be essential to provide MNEs within the scope of these new rules with the certainty that the OECD envisages.

For more information, please get in touch with Suze McDonald, or your usual RSM contact.

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